UPDATE: Barclays Downgrades Defense, Expensive Names
On Monday, Barclays downgraded the defense subgroup to Neutral. Analyst Carter Copeland believes it is “difficult to argue for further P/E expansion” due to “raised expectations, discounts largely erased, and unlikely premium growth.”
In the note, Copeland identifies a shift in investor focus from “debating downside to debating upside,” which “resulted in a continued upward re-rating and outperformance in defense stocks YTD.”
Defense company revenues should peak in 2015, but Copeland is “not sure that the growth rate that is achievable out of this trough is sufficient to warrant an above-market multiple, especially given average EPS growth on a declining revenue base, coming essentially from pension and repos alone.”
Specifically in the defense subgroup, the analyst downgraded the most expensive names:
- General Dynamics (NYSE: GD) from Overweight to Equalweight. Maintained a $119 price target.
- Harris (NYSE: HRS) from Equalweight to Underweight. Price target raised from $70 to $73.
- Huntington Ingalls (NYSE: HII) from Equalweight to Underweight. Price target lowered from $110 to $106.
Raytheon (NYSE: RTN) holds Copeland's lone Overweight rating in the subgroup. The analyst raised the price target from $110 to $115.
Shares of General Dynamics were up 0.83, Harris up 1.2 percent, Huntington up 0.55 percent and Raytheon up 0.72 percent respectively in Monday's trading.
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